NewRiver REIT plc - Half Year Results

Allan Lockhart, Chief Executive commented: "NewRiver has delivered a robust performance in a challenging market, with resilient cash returns underpinned by solid operational metrics. Our continued focus on the growing sub-sectors of the market characterised by convenience, value and frequent spend on everyday essentials continues to serve us well.

 

During the period we remained active across our retail portfolio, signing leases with growing, best-in class operators and progressing our risk-controlled development pipeline, most recently reaching practical completion at Canvey Island Retail Park in Essex. We continued to diversify our portfolio by investing in high-quality community pubs through the acquisition of Hawthorn Leisure, where integration is progressing well and we remain on track to deliver annualised scale-based synergies of at least £3 million. We achieved all of this while maintaining the strong balance sheet required to support our growth ambitions.

 

Looking ahead, our income profile is well-diversified and we have deliberately avoided sub-sectors such as department stores, mid-market fashion and casual dining, which we believe are most exposed to the structural changes impacting the retail market. The way that people live, work and consume is evolving rapidly and, as an active and specialist owner of community assets with a strong balance sheet, we are well placed to adapt to and benefit from these changes."

 

Proven business model delivering robust cash returns, underpinned by a strong balance sheet

·      Funds From Operations ('FFO') of £25.3 million (HY18: £26.5 million); decrease mainly due to £2.2 million one-off promote received in the prior period, offset by net acquisition activity; FFO of 8.3 pence (HY18: 10.0 pence)

·      Ordinary dividend per share increased by 3% to 10.8 pence (HY18: 10.5 pence); 77% covered as our disciplined approach has meant capital is not yet fully deployed in anticipation of future acquisition opportunities

·      Q3 FY19 ordinary dividend increased by 3% to 5.4 pence per share (Q3 FY18: 5.25 pence)

·      EPRA NAV per share of 283 pence (March 2018: 292 pence), impacted by valuation decline of 1.8% 

·      Total Property Return +2.4%, +230 bps vs MSCI-IPD benchmark; Total Accounting Return of +0.6% (HY18: +6.3%)

·      Proportionally consolidated LTV of 35% (March 2018: 28%); increase due to acquisitions; well within guidance

·      IFRS net assets £864.3 million (March 2018: £892.4 million); Net property income £43.2 million (HY18: £40.1 million); IFRS profit after tax £2.7 million (HY18: £29.3 million); IFRS basic EPS 0.9 pence (HY18: 11.0 pence)

 

Strength of operational metrics demonstrate resilience of convenience & community focused portfolio

·      Retail occupancy of 96.2% (March 2018: 96.5%); Pub occupancy of 98.6% (March 2018: 99.0%)

·      127 retail leasing events across 653,000 sq ft; long term deals on terms 10.7% ahead of previous rent

·      Affordable average retail rent of £12.48 psf (March 2018: £12.36); deliberately limited exposure to structurally challenged sub-sectors such as department stores (<0.1% of total income) and casual dining (1.1%)

·      Like-for-like footfall across shopping centres declined 1.9%; outperforming the UK benchmark by 100 bps

·      Like-for-like net income across retail portfolio -0.5% reflecting impact of CVAs and administrations

 

Remaining disciplined and active in our key investment markets

·      Hawthorn Leisure acquired in May 2018 for an enterprise value of £106.8 million, representing a NIY of 13.6%; portfolio of 298 high quality community pubs and an established pub management platform; integration of business progressing well and expected to complete in Q4 FY19; already successfully unlocked £1.7 million of £3 million of expected annualised operating cost synergies and expect to see the benefit of these from early 2019

·      Acquired Grays Shopping Centre in June 2018 for £20.2 million and a NIY of 9.4%, and Hollywood Retail & Leisure Park in Barrow-in-Furness in July 2018 for £15.3 million and a NIY of 8.7%

·      Completed £14.6 million of disposals 1% ahead of book value, including sales of Whitwick Retail Park in Coalville for £9.9 million, representing a NIY of 6.9% following completion of a programme of active asset management initiatives; further £20.5 million of disposals completed post period end and £23.3 million under offer

 

Good progress with our strategic opportunities in a changing environment

·      Asset Management Platform: signed first agreement with Canterbury City Council at Whitefriars Shopping Centre

·      Residential development: completed strategic review of entire portfolio; identified potential to deliver up to 1,300 residential units adjacent to or above our retail assets over the next 5-10 years, in addition to existing pipeline of 1,100 units

 

Growing income streams and generating value through 1.8 million sq ft risk-controlled development pipeline

·      Reached practical completion on 62,000 sq ft Canvey Island Retail Park development; M&S Foodhall and B&M expect to open in January 2019; fully-let annualised rent roll of £1 million and projected yield on cost of 9%

·      Convenience store ('c-store') development programme for The Co-operative saw completion of two c-stores during the period; on-site with a further four, which on completion will bring total number delivered to 25

Financial Statistics

Performance

Note

HY19

HY18

Change

Funds From Operations ('FFO')

(1)

£25.3m

£26.5m

-5%

FFO per share (Pence Per Share)

(1)

8.3

10.0

-17%

Ordinary dividend (Pence Per Share)

 

10.8

10.5

+3%

Dividend cover

 

77%

95%

 

Admin cost ratio

 

13%

11%

 

Interest cover

(2)

3.8x

4.6x

 

Net Property Income

 

£43.2m

£40.1m

 

IFRS Profit after taxation

 

£2.7m

£29.3m

 

IFRS Basic EPS (Pence Per Share)

 

0.9

11.0

 

EPRA EPS (Pence Per Share)

 

8.0

9.3

 

Total Accounting Return (paid basis)                                                     

(3)

+0.6%

+6.3%

 

 

Balance Sheet

Note

Sep 2018

March 2018

Change

IFRS Net Assets

 

£864.3m

£892.4m

 

EPRA NAV per share (Pence Per Share)

 

283

292

-3%

Shares in issue

 

303.4m

302.9m

 

Balance Sheet (proportionally consolidated)

Note

Sep 2018

March 2018

Change

Principal value of gross debt

 

£525.0m

£469.0m

 

Cash

 

£30.8m

£116.2m

 

Cost of debt

(4)

3.2%

3.1%

 

Average debt maturity

(5)

7.4 years

7.9 years

 

Loan to value

 

35%

28%

 

 

Chief Executive's review

 

I am pleased to report another period of solid performance for NewRiver, during which our proven business model, and focus on those sub-sectors characterised by frequent, store-based spend on everyday essentials, allowed us to navigate challenging market headwinds and continue to deliver resilient cash returns to our shareholders.

 

Market backdrop

 

For the UK retail sector, market trends in the first half were broadly similar to those in the previous financial year. Retailers continue to face a range of cost pressures at a time when the growth of online retailing, changes in consumer behaviour and increased competition are significantly altering market dynamics. Low consumer confidence and continued economic and political uncertainty are compounding these issues further. While many retailers have fared well despite these headwinds, for others they have exposed challenged business models leading to weaker performance, requests for rent reductions and, in extreme cases, a number of business failures.

 

NewRiver's response to these challenges has been consistent and effective. Firstly, we have continued to focus our portfolio on the growing and sustainable market sub-sectors which meet the everyday needs of UK consumers. These sub-sectors - which include food & grocery, discounters, grab & go food, value fashion and health & beauty - are sustainable because they provide essential goods and services, and are resilient to online retailing, either because online fulfilment would be too costly or because a face-to-face service is an integral element of their offer. Secondly, we work closely with our occupiers to provide affordable rents, low occupational costs and attractive, well-located spaces which allow their businesses to thrive, in turn underpinning the sustainability of our income streams. Thirdly, where our occupiers do face challenges, we are proactive in finding solutions to protect the value of our assets and the security of our income. Finally, we have a relentless focus on extracting further value from our assets, either through our risk-controlled development pipeline or our strategic opportunities first outlined in May 2018.

 

The challenges facing the retail sector are being reflected in the valuations of some retail assets. Due to the differentiated nature of our assets, which are typically higher yielding and have smaller lot sizes than those of our peers, we have been pleased to see relatively small reductions in valuations across our shopping centres, and stable valuations  across our retail parks. The investment market for these types of asset has remained active, as demonstrated by the disposals we have made and the assets currently under offer, realising disposal prices that are on average ahead of March 2018 valuations. 

 

The UK pubs sector has generally performed well over the last six months. Wet-led outlets, which represent the vast majority of the NewRiver portfolio of 616 community pubs, continued to outperform the market, benefitting from the warm weather and the World Cup during the period, while being insulated from the ongoing challenges faced by casual dining operators, such as market overcapacity and increasing multi-channel competition. Against a backdrop of low consumer confidence and limited real wage growth, the pub remains an affordable treat and an integral part of community life.  

 

Outlook

 

We expect the challenges faced by the UK retail sector to continue in the near-term. We see diverging performance between retailers in the growing, online-resilient sub-sectors focused on essential goods and services, where NewRiver is positioned, and those in the structurally-challenged sub-sectors severely impacted by low consumer confidence, the rise of e-commerce, and market overcapacity. In pubs we have seen wet-led community pubs, which represent the vast majority of NewRiver's portfolio, outperform, while destination and food-led pubs have been impacted by the wider malaise in the casual dining sector, and we expect this trend to continue into the future.

 

The rigorous execution of our business model ensures that we align our portfolio with the best performing areas of the market through disciplined stock selection, and that we have the expertise and ability to extract further value for our shareholders and communities through active asset management and risk-controlled development, even when the market faces disruption. Through continuing this approach, and building on the excellent progress made to date on our strategic priorities, we are confident that NewRiver will continue to provide growing returns to our shareholders.

 

Allan Lockhart

Chief Executive

20 November 2018